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12,883
19,972
18,052
76
5,783
6,822
7,160
5,542
3,532
1,661
835
979
6,608
8,133
2,213
39,838
41,102
5,101
215
10,347
8,159
5,063
161,559
106,433
*** Citron did not include Gastrointestinal because it is mainly Omeprazole (generic Prilosec) and Pantoprazole (generic
Protonix) . These are both proton pump inhibitors that are low margin, high volume, and highly competitive.
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Wall Street took notice of this Bloomberg news coverage, and sent Lannett stock down to $17.
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Just two of many charts in the National Benefit Fund vs Lannett and Mylan class action complaint filed 12/14/2016. NBF is one
of the strongest labor management funds in the nation.
/wp-content/uploads/2017/01/National-Benefit-Fund-Class-Action-Complaint-Collusion-Against-Lci.pdf
Just two weeks later, on December 28, the Rochester Drug Co-operative, one of
the nations fastest growing healthcare distributors, filed a similar lawsuit against
Lannett accusing them of price fixing the price of Levo.
/wp-content/uploads/2017/01/Rochester-vs-Lannett-Complaint.pdf
Both of these lawsuits (especially the Rochester Drug Co-op suit) do an amazing
job detailing the roadmap of what the Department of Justice is undoubtedly
finding while investigating Lannett.
Collusion on price hikes is beyond question. These lawsuits are better than a
smoking gun: they are DNA evidence and nothing short of a confession.
Lannett's CEO has actually bragged about raising prices and is now worried about
competitors:
Mylan is one of those rational competitors, so were not really
expecting anything crazy from them.
-- Arthur Bedrosian, Lannett CEO
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The price of Levo and the future of Lannett will be sealed on of these 4 inevitable
events.
1. Competitors lowering pricing amongst current scrutiny
2. Lannett is forced to eliminate the price increases over the past 2 years
3. Another generic enters the Levo market, which is inevitable at these prices
4. Lannett cannot possibly sustain their Levo supply agreement at current
terms. This distribution deal, which expires in 2019, will either fall due to
price fixing, or be dramatically repriced. The gravy train ends, either way.
Lannetts second largest drug last quarter was Fluphenazine (Fluph).
In what some would call the ultimate demonstration of chutzpah Lannett raised
the price on this newly acquired drug schizophrenia drug by 1900% in the middle
of 2016 ... amidst the middle of the drug pricing scrutiny storm.
Arthur Bedrosian:
No you didn't.yes you did.no you didnt.yes you did .
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These two Forbes articles written this year do a good job of describing this
egregious behaviorthey also expose the CEOs fake (mail order) degree and
former tax problems.
1. http://www.forbes.com/sites/nathanvardi/2016/10/06/another-drug-company-thatraises-prices-like-crazy/#4a0f99033488
2. http://www.forbes.com/sites/nathanvardi/2016/11/03/lannett-leads-generic-drugmaker-stock-plunge-on-news-of-escalating-federal-pricing-probe/#3ae43d321dcc
Why did they raise the price of the Fluph 1900% in a year? Not because they
wanted to, but that had to! Lannett acquired the rights to Fluph in their
untimely, hideously mispriced 2015 acquisition of Kremers, which closed just
weeks after the now infamous Hillary tweet.
In a move that can only be understood as reflecting complete desperation,
Lannett submitted its bid for Kremers without a Material Adverse Events Clause
in their contract. They bought Kremers for $1.3 billion, despite Kremers just
having lost their largest customer, primarily due to the FDAa ruling about
declassification of their generic Concertathe customer had accounted for close
to 40% of Kremers EBITDA before that ruling.
After leveraging up Lannett as far as it could be stretched to fund the acquisition,
the only thing left to do was what they know best: gouge pricing on the
remaining drug. Note this Kremers acquisition was the turning moment where
they company acquired debt and rose to its highest level of incompetence.
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/wp-content/uploads/2017/01/Velardi-vs-Lannett-Class-Action-complaint.pdf
https://www.bloomberg.com/news/articles/2016-11-03/u-s-charges-in-generic-drug-probe-said-to-be-filed-by-year-end
https://www.bloomberg.com/news/articles/2016-12-22/widespread-drug-price-increases-point-to-collusion-study-finds
price in order to obtain market share, NECA-IBEW said. The statement is a signal
that Lannett understood that Impax, Par and Mylan, among others, were no
longer interested in competing on price, an understanding that could only exist if
the three firms had reached a consensus on how to price.
https://www.law360.com/articles/776335/generic-cos-face-another-antitrust-suit-over-drug-prices
It does not take an antitrust attorney to understand that chart is a detailed map
of what price fixing looks like. That is why in November of 2016, Bloomberg
reported that the DOJ is investigating Lannett and other for price fixing Digoxin.
What CEO Bedrosian might consider in his words a rational competitor quickly
turns into a "co-conspirator" when this pattern is exposed.
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Gallstone Segment
Look at what happens when someone doesn't collude. The revenue breakdown
shows a steep decrease in the price of the generic, as natural market forces keep
prices in trim.
Lannett's gall bladder medicine Ursodiol is a likely "tell" for the stock after the
effects on larger drugs follow the pattern. Lannett said that the price of its
gallstone medicines, including Ursodiol, rose by 907% in the year ended June 30,
2015, adding $58.7 million to sales. More important than sales: all price
increases go right to the bottom line.
But now that competition has showed up, revenues for Lannett's gall bladder
segment fell by 35%. (Green highlight in the revenue segment table, page 2,
above.) This vulnerability for the rest of Lannett's portfolio is obvious.
Two years ago, ursodiols wholesale price was as low as 45 cents a
capsule. Then in May 2014, generic drug manufacturer Lannett Co. hiked
its price to $5.10 per capsule, and one by one its competitors followed
suit with most charging nearly the same price.
Experts say this is not how a competitive marketplace is supposed to
work.
-- LA Times Sept 1, 2016
http://www.latimes.com/business/la-fi-mylan-price-hikes-20160830-snap-story.html
-- Arthur Bedrosian, Lannett CEO
OK, Wall Street- This is Where the Rubber Hits the Road:
Citron Does The Work to Show Lannett's Path to Bankruptcy!
Lannett has the clearest path to bankruptcy in the pharmaceutical industry.
We worked out the financial scenario to show that if Lannett had to roll back
pricing to where it was just 2.5 years ago, the company would violate their debt
covenants ... and go bankrupt!
Citron did some digging into LCIs debt covenants, which require LCI to not exceed
a 4.25x Net Debt / EBITDA covenant through 12/31/17 (which then moves lower
from there):
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Page 9 of 12
LCI
Debt Analysis
Term Loan A Gross
Term Loan B Gross
Revolver
Debt
264.7
757.4
125.0
1,147.1
Debt
Cash
1,147.1
(241.7)
Gross Debt
Net Debt
1,147.1
905.4
Debt / EBITDA
3.90x
3.08x
Covenant
Break-Even
FY 17 EBITDA "Guidance"
293.8
293.8
293.8
293.8
73.5
51%
73.5
50%
73.5
75%
73.5
100%
(37.8)
(36.8)
(55.1)
(73.5)
83.6
51%
83.6
50%
83.6
75%
83.6
100%
EBITDA Lost
(43.0)
(41.8)
(62.7)
(83.6)
(80.8)
-27%
(78.6)
-27%
(117.8)
-40%
(157.1)
-53%
Total PF EBITDA
213.0
215.2
176.0
136.7
4.25x
4.21x
5.15x
6.62x
12/31/17 Covenant
4.25x
4.25x
4.25x
4.25x
Fluphenazine Impact
Fluphenazine Upside vs. FY 16
% Given Back
EBITDA Lost
Levothyroxine Sodium Impact
Levo Upside vs. FY 13
% Given Back
Note: LCI guides to EBIT, not EBITDA so D&A is estimated based on last Q run-rate.
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With the amount of debt currently loaded, at 3.9x EBITDA, there is no doubt in
our mind that drastic steps are going to have to be taken over the next four years
in order for this company to be able to survive without a restructuring in fact,
we think it is near impossible.
It gets worse for Lannett. In the past week, its headwinds got
stronger.
Citron was not going to release this article until we understood the current state
of generic pharmaceutical pricing. For this we looked to the recent JP Morgan
healthcare conference, to which Lannett was not even invited, to gauge the
commentary surrounding larger generics. The message of challenging generic
pricing environment was a constant underlying theme amongst all of the larger
players.
Worse, this past week President Elect Trump expressed his continued dedication
to lowering prescription drug pricing, stating that the industry is getting away
with murder and opening the door for foreign drug companies.
One example how this trend can break Lannett is to look at a recent ANDA filed by
Apotex, a sizable Canadian pharma company who is a huge supplier of generics to
the US, with low-cost manufacturing capability in India. Apotex lists Levothyroxine
as "filed" with the FDA.
http://www.apotexpharmachem.com/images/downloads/product-list/us/Apotex%20Pharmachem%20Product%20List.pdf
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Conclusion
In this report, Citron has proven a clear path to bankruptcy. Lannett will clearly
fall under their own debt load as they encounter macro trends which they cannot
escape. It should be noted that Lannett is not a real pharmaceutical company -for years it lingered as a single digit stock and even traded under cash at one
point, until management learned how to raise prices and rip off the government.
They then levered up the company and made an egregiously overpriced
acquisition that will prove to be fatal.
CEO Bedrosian once boasted to a conference In the generics business you are
only as strong as your most stupid competitor
Well, now the truth is you are only as strong as your most scrutinized competitor.
Citron points out that Concordia has already followed this path from $24 to $2.
For Lannett, it is only a matter of time.
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